Background Check – It’s not the event – but the response that matters most.
As the next FOMC meeting and the speculation about what’s next develop and evolve, it’s important to keep the most crucial of all trading principles in mind: it’s not the event, but the response to the event.
Certainly, the markets are pricing in that the Fed will hold rates at current levels. They base this on the CME Fed funds futures which currently tell us that there’s roughly a 10% chance of another rate hike in October.
This indicator is usually reliable.
What’s more important is what the market does in response to whatever the Fed does. More important, it’s all about what Chairman Warsh says at the press conference.
If I was a betting man, I would put my money on Warsh being the same evasive hawk he’s been since he hit the podium a few months back. I would expect lots of talk about “price stability.” He may even revisit his “no free rides” remark from the recent IMF meeting.
That’s all well and good. Moreover, the majority of investors expect the market to sell off after Warsh’s latest Darth Vader impersonation.
Gauging the Response
But what if the market rallies in response to the Fed instead of breaking to a new low?
What’s the best gauge to point us in the right direction?
In my humble opinion, a successful trading campaign starts with a sound plan, as I describe below.
That’s the blueprint for your response options.
The best way to put your pre-planned strategies is, in my opinion, the action in the New York Advance Decline line (NYAD, see below for full details).
That’s because it’s an unfiltered gauge of the market’s action where each company counts the same as any other. There’s no distortion from the index weighting of megacap stocks.
If it goes up that will tell me that more stocks are rising than falling. That increases my odds of picking winners. If it falls, it will signal that it’s a good time to hold onto my money and to monitor my Sell stops on any existing positions.
If this happens do this
So, here’s my plan:
I’ve been compiling a shopping list during the recent market decline. I’ve set up alerts that will be triggered when these stocks move above or below my preset levels.
When the alerts hit, I’ll be reviewing the price charts of these stocks for confirmation. I’ll be making sure they’ve cleared my BUY points. I’ll be checking the volume on the move. And I’ll double check my backup indicators (ADI and OBV) to make sure money is moving in or out of the stocks which have triggered alerts
I’ll compare the action in these stocks to the market, and I will decide whether to enter each one individually based on what my indicators tell me.
There is no guesswork. I’ve already got a road map.
And I won’t be making any decisions if all the boxes aren’t checked off.
In addition, I’ll see how my portfolio is holding up during the market’s response to the unfolding events.
If anything gets stopped out, I won’t be upset. I’ll just be glad I’m out of a position that’s not working and that I’m raising cash which I’ll be deploying into a new position when the opportunity arises.
Bottom line
I won’t be surprised because I’ve already developed my “if this happens do this” plan and mapped out appropriate responses to the plausible scenarios.
I’ve already made my decisions. I’ve got my marching orders. All I need is a trigger.
There’s no drama, no fuss.
At this stage of the game, there’s just one thing that matters; execution of a well thought out and predetermined “if this happens, do this” plan.
The primary factor, however, is the status of liquidity in the financial system created by the Fed’s “pause” of the RMP program (which has removed $480 billion/year) from the financial system are keeping the bulls in their pens right now.
There’s no reason to be in a hurry in this market, especially over the next 48 hours as the Fed meets.